Allowances, Differentials, and Other Special Pay
Payments received by U.S. Government civilian employees for working abroad, including pay differentials, are taxable. However, certain foreign areas allowances, cost of living allowances, and travel allowances are tax free.
Pay differentials you receive as financial incentives for employment abroad are taxable. Your employer should have included these differentials as wages on your Form W-2, Wage and Tax Statement.
Pay differentials are given for employment under adverse conditions (such as severe climate) or because the location of the employment is outside the United States. The area does not have to be a qualified hazardous duty area as discussed in Publication 3, Armed Forces’ Tax Guide.
Foreign Areas Allowances
Certain foreign areas allowances are tax free. Your employer should not have included the following allowances as wages on your Form W-2:
- Certain repairs to a leased home,
- Education of dependents in special situations,
- Motor vehicle shipment,
- Separate maintenance for dependents,
- Temporary quarters,
- Transportation for medical treatment,
- Travel, moving, and storage.
Allowances received by foreign service employees for representation expenses are also tax free under the above provisions.
If you are stationed outside the continental United States or in Alaska, your gross income does not include cost-of-living allowances granted by regulations approved by the President of the United States (other than amounts received under Title II of the Overseas Differentials and Allowances Act). Cost-of-living allowances are not included on your Form W-2.
Lodging Furnished to a Principal Representative of the United States
Lodging (including utilities) provided as an official residence to you as a principal representative in a foreign country is tax free. However, compensation paid by your employer for your usual household expenses are taxable, and withholding from your pay to cover these expenses are not deductible.
Federal Court Employees
If you are a federal court employee, the preceding paragraph also applies to you. The cost-of-living allowance must be granted by rules similar to regulations approved by the President.
American Institute in Taiwan
If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U.S. tax if they are equivalent to tax-exempt allowances received by civilian employees of the U.S. Government.
Federal Reemployment Payments after Serving with an International Organization
If you are a federal employee who is reemployed by a federal agency after serving with an international organization, you must include in income any reemployment payments you receive.
If you are a Peace Corps volunteer or volunteer leader, some allowances you receive are taxable and others are not.
Allowances are taxable and must be included on your Form W-2 and reported on your return as wages. These include:
- Allowances paid to your spouse and minor children while you are training in the United States,
- Living allowances designated by the Director of the Peace Corps as basic compensation. This is the part for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses,
- Leave allowances,
- Readjustment allowances or "termination payments."
Nontaxable allowances should not be included on your Form W-2, whether paid by the U.S. government or the foreign country in which you are stationed, includes:
- Travel allowances and
- Part of living allowances for housing, utilities, food, clothing, and household supplies.
- Publication 516, U.S. Government Civilian Employees Stationed Abroad
- U.S. Citizens and Resident Aliens Abroad
- U.S. Foreign Service Employees
- U.S. Government Civilian Employees Stationed Abroad